August 2015

Summertime Slump in the Stock Markets Again

Questions from the Field:
During the course of teaching seminars, writing articles and newsletters, and meeting with clients we
hear lots of questions. We will try to address some of the more timely and relevant questions that
investors, executives, and retirees are asking us. Our question(s) for this month are:
Q: The stock market is dropping am I still invested in the right places? Should I do anything?

I was up early Monday morning, reading the global economic news. I have been in the investing and
wealth management business professionally for over 20 years, and a stock investor since I was a
teenager in college, and have been through many market downturns. After all these years it is still as
unnerving and unsettling this morning, to see investments drop in value, as it was each and every time
before this.
A natural response, and some of the questions that clients have been asking us are; what is going on?
Are we still invested in the right place? What should we do? And I think that underlying all of the
uncertainty, our most basic drive and need is whether we are still going to be all right financially if
we will be able to maintain and/or reach our goals of financial security.
Lets try and take our perspective from history and review some facts to help put the last weeks into
context.

Stocks are Important for Retirement Success

Owning stocks as part of our portfolio is a vital to our retirement success. History has proven time and
time again that a retiree is potentially far better off with a healthy allocation of stocks in their portfolio
even though stocks tend to have large drops in value from time to time.
The graph below gives a very clear portrayal of that truth. A study performed by Dr. Craig Isrealsen in
2010 compared two retiree portfolios; 100% government bonds that are essentially principal risk free,

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and a mix of 60% stocks and 40% bonds - and asks the question, what will the value of that retiree
portfolio be at the end of 25 years if the investor takes 5% of the portfolio per year for income?

(Death by Withdrawal Rate Dr. Craig Israelsen, PhD)

The answer from history? Going back to before the Great Depression, a portfolio of at least 60% stocks
had a 95% success ratio and usually had a higher balance at the end of 25 years than when the investor
started. The risk-free bond portfolio fared miserably by contrast failing over half the time, and
often falling to a zero balance before the 25 year periods ended.
(Past performance is not indicative of future results. Investing involves risk, including loss of principal.)

Ten Percent drops are Common (and so are larger drops)

As I am writing this the US Stock market has dropped about 10 percent from its high of a few months
ago. While uncomfortable it is hardly new as we have had similar drops 123 times since 1900. In
other words, a ten percent drop has occurred regularly and like clockwork about once per year since
our grandparents time. Larger drops of twenty percent or more happen a little less often, but still
commonly occur about every three years.
Market history also tells us that the market tends to recover fully from a ten percent drop in about a
year or sometimes less, and tends to recover fully from a twenty percent drop in about 3 years.

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The application to us as investors stock market drops happen all the time, and they usually recover
with a little patience.
(Investors cannot invest directly in an index.)

History Rewards Risk Taking

Is it worth it to own an investment like stocks that drop so much and so often? The answer from history
is a resounding yes.
US Stock Market (Dow Jones Average) 1900 - Now

(www.stockcharts.com)

Value of One Dollar Invested by Asset Class: 1928-2004

Large Value Stocks: $5,642

Large Growth Stocks:

Small Value Stocks:

Small Growth Stocks:

$859
$43,604
$1,164

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(Source: Eugene Fama, Kenneth French, University of Chicago)

An investor may have more money and, as we just saw, might potentially have a better retirement if
they own stocks for the long term.

Diversification Helps
A diversified mix of investments can often help mitigate risk. 2015 gives us evidence of this in our
portfolios as overseas stocks as a whole are down less YTD than US stocks. Furthermore, during the
last month, bonds in general, gold and gold stocks are actually up in value while most stocks have been
declining.

Another important part of our diversification plan is dividends. Dividend stock investments in general
tend to be down less this year than the overall US stock market, and we have the optional benefit of
reinvesting our dividends at the current lower price also. We significantly increased weightings to
dividends several years ago in most client portfolios.
A proper diversification plan is taking a little of the sting off this current downturn, and can be an
effective long term part of our investing strategy.

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Market Timing does not Work

A temptation that all of us as investors have is to try and time the market that is to make major
changes in our allocations in anticipation of the markets going up or down. Unfortunately market
timing does not work. The investment markets are random and unpredictable, and subject to so many
economic, political, social and other influences that it is impossible to know where the markets will go
in the short term.
Said Peter Lynch, Fidelitys famed investment chief and perhaps the most successful mutual fund
manager of all time,

"Far more money has been lost by investors preparing for corrections, or
trying to anticipate corrections, than has been lost in corrections
themselves.

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(https://www.edwardjones.com/groups/ejw_content/@ejw/@us/@graphics/documents/web_content/web034039.pdf)
The only sure thing we know about market timing is that avoiding that temptation and staying invested
through good times and bad has been very effective throughout history.

Financial Media is not your Friend

The financial media is not working with investors best interests in mind. Rather, their motivation is to
sell magazines, drive viewers to websites and blogs, and higher ratings for TV shows. They try to
create drama, titillate and scare, all in the hopes of increasing readership, views and clicks.
The tried and true principles of diversification and patience make for dull reading and poor headline
fodder. Use discernment when you read and remember that the medias goal is to try and upset,
captivate and sell to you.

Still Investing Take Advantage of Lower Prices

If you are still a net investor, that is you are regularly or periodically adding new money to your
portfolio, than a market drop means that stocks are on sale. Many of our clients have liquidity events
happening or excess cash flow that allows the opportunity to add to their portfolio, and obviously we
would rather make new investments when prices are down.
However, there is an old Wall Street saying, Dont try to catch a falling knife. It would be
appropriate for us to discuss and try and fine tune when and where to add new investment dollars given
the current uncertainty. Lets review this topic at our next meeting.

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Review your Cash and Liquidity needs regularly

A significant number of clients read our May newsletter (Dow 18,000 What Should I do About
Risk?) and took withdrawals from their portfolios for cars, vacations and other spending, paid down
debt, raised cash, and made gifts to family and charity.
No matter what level the markets are at, it is important to review our cash and liquidity needs regularly
and make sure we have a long term income plan in place. If we have those retirement basics thought
through and implemented, a downturn might have a lesser impact on us.
This is a regular topic of our client review meetings, and of course please let us know if something has
changed in your cash and income needs before our next meeting, or you would like to review this
subject again.
The previous principles are long standing investment maxims that have helped guide investors to
success through the years, and are timeless in their application. Lets also look at some specific issues
that are timely to our portfolios and financial lives today.

Its Happening Again - 2011, 2012, 2013, 2014, and now 2015
Five of the last six years have seen significant downturns in late summer/fall. 2011 saw a 2000 point
drop in August and then a second drop in October. 2012 also saw a 1000 point drop in early summer,
and again a slightly smaller drop in October. 2013 again had an August and October double drop of
close to 1000 points each time, and finally 2014 once again had two drops in August and October. In
each of those years the stock market fully recovered and ended in the black for the year. (Please see
the graphs for each year at end of this letter.)
So here we are again and we are once more watching a late summer tumble in the markets in 2015.
Will this time be different than the last four times? No one knows, but it does lend some perspective
that this has been a somewhat regular occurrence in the recent past. History also tells us that October is
the worst month of the year to be invested in stocks, and that November and December are often some
of the best months of the year.

This Could get Worse

As I am writing this the US stock market has dropped about ten percent since its high of the year in
May. Remember we have seen larger late summer drops in recent years, and again even a 20% drop is
a regular event in stock market history. A 20% drop would put the Dow Jones Average at a level of
about 14,700 another 1200 points down from Mondays close. The Dow Jones average was last at

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that level in October of 2013 so another way of looking at a 20% drop is a retracement of the last two
years progress.
So will it get worse? I dont know and neither does any other self-proclaimed guru, seer or market
prophet. There are some huge unanswered questions about the economy and the markets; What
happens to the stock markets and economy when the Fed finally stops printing money? What about the
skyrocketing US debt? What about the 3 Trillion plus in new money that the Fed has created since
2008?
If you are a long time reader of our letters you know that I have been writing about Quantitative Easing
and money printing, the US Debt, and the US dollar for the last ten years, and that I have a great deal
of concern about how all these will play out over time. There is no definitive answer, but a broad
diversification plan and a robust income and cash & liquidity plan is perhaps the best response in the
face of the economic uncertainty due to the historically unprecedented and egregious actions of the
Federal Reserve.

When will the Fed raise Interest Rates?

When I was a young boy in school I got in a trouble. A lot. Nothing horrible by todays standards, my
mischief usually involved talking too much or goofing off in class resulting in a trip to the office and a
call to my Mom. We had a patriarchal family; my Mother would make me wait in my room after
school, always accompanied by the threat of, Just wait until your Dad gets home! I had a very strict
European father who did not tolerate any misbehavior from his children, and I was scared of him and
his punishment.
Several hours alone in my room, waiting in dread for what came next was almost unbearable. The
longer I had to wait, the worse my potential punishment grew in my mind. It was somewhat of a relief
when he finally did come home, and I received the spanking or other consequence that I probably
deserved. Looking back at it, I think that the contemplation of the punishment during those hours
confined to my room might have been worse than the punishment itself.
The US Markets are kind of like I was back in my school days. Just like I was dreading and waiting for
my Dad to come home and give me a punishment the markets are dreading the threat of an interest
rate increase by the Fed. Just like me they have had to wait a long time, and just like me, the longer the
wait, the more uncertainty, and the more upsetting the thought of the event became.
The Fed has been hinting at a rate increase now for almost a year, and as a result there has been a great
deal of volatility in the stock market. The more imminent that the pundits and markets believe that
rates will increase, the worse stocks behave.
Perhaps just like with my Dad, the actual event will be less traumatic than the anticipation of it. As
long as the Fed delay and lingers over the rate increase, it is highly likely that uncertainty will remain
high and stock prices may respond accordingly.

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China
The Chinese stock market has dropped recently, worse than US markets. Companies with significant
sales in China like Apple and Luis Vuitton (LVMH Group) have seen their share prices drop with
worries that demand by Chinese consumers will slow down. Commodities like copper and oil have
also fallen as China is the worlds largest consumer of basic goods and any slowdown is likely to
impact most commodity markets as well.
Much ado has been made in the media about this, and it certainly a very large drop. But again, to try
and put things into some logical perspective, the Chinese stock market has more than doubled since
2013 before this current pullback, and even with worries about the Chinese economy and a slower
projected growth rate, China is still expected to growth their economy at roughly triple the rate that the
United State is.
Shanghai Composite Index Jan. 2014 - now

Oil Prices are Low

Oil prices are hovering in the low $40 to high $30 per barrel range, less than half of what we saw in
early 2014. There are two groups that are particularly and adversely impacted by that; Saudi oil sheiks
(and other energy exporting countries like Canada and Venezuela and Russia,) and most energy
companies.

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Outside of that group, low energy prices are a tremendous boon. Airlines are happy, energy intensive
industries are happy, manufacturing jobs become more competitive domestically with cheap energy,
farmers are happy, and consumers are overjoyed. Economists have estimated that every 1 cent drop in
gas prices at the pump translates into about a $1 Billion additional stimulus into the US economy.
Some rough math suggests that the US might enjoy an additional $150 Billion annually benefits as gas
prices are about 1.50 gal. lower now than they were in early 2014 a tremendous boost to our
economy.

So what should we do?

Is it uncomfortable to watch our investments go down heck yeah! Nobody enjoys that feeling.
Should we do something now? Warren Buffet famously said,

Lethargy bordering on slothfulness is the cornerstone of our investment style.

The key principles as always are to review your short term needs for cash and liquidity, have a sound
income plan in place, know and regularly review your risk level and risk tolerances all topics that we
try and discuss on a regular basis, and implement individually as appropriate.
We look forward to our next review meeting, and as always we are available to answer questions and
discuss concerns if you want to contact us before our next scheduled meeting.
We hope you have had a wonderful summer and enjoyed our delightful weather (at least for those of us
in Seattle!) with your family.

Warm Regards,
Willy

William R. Gevers
Financial Advisor
PS: We have been repeatedly asked by clients if they could share these e-mail notes with their friends
or neighbors. Please feel free to forward this with the stipulation that it may only be forwarded if done
so in its entirety with no portions omitted. We would be delighted to share our comments and opinions
with your friends, and welcome your comments and feedback. If you received this and would like to be
included on our newsletter list, please email us at info@geverswealth.com
Copyright 2015 William R. Gevers. All rights reserved.

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Gevers Wealth Management, LLC

5825 221st Place SE
Suite 102
Issaquah, WA98027
Office: 425.902.4840
Fax: 425.902.4841
Email: wgevers@geverswealth.com
Website: www.geverswealth.com
The views are those of Gevers Wealth Management, LLC, and should not be construed as individual investment advice. All information is believed to be from reliable
sources; however, no representation is made as to its completeness or accuracy. All economic and performance information is historical and not indicative of future results.
Investors cannot invest directly in an index. Please consult your financial advisor for more information. Securities and advisory services offered through Cetera Advisor
Networks LLC Member FINRA/SIPC. Cetera is under separate ownership from an any other named entity.

2011 DJIA Return:

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2012 DJIA Return:

2013 DJIA Return:

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2014 DJIA Return:

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US Money Supply, US Dollar, and Inflation/Deflation Watch

"Neither a wise man nor a brave man lies down on the tracks of history to wait for the
train of the future to run over him." - Dwight D. Eisenhower

US Money Supply Adjusted Monetary Base

(http://research.stlouisfed.org/fred2/graph/?s%5B1%5D%5Bid%5D=AMBNS#)

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US Dollar Price (DXY) USD Index measured against other currencies

(http://www.barchart.com/chart.php?sym=DXY00&style=technical&template=&p=MC&d=X&sd=&ed=06%2
F11%2F2015&size=M&log=0&t=LINE&v=0&g=1&evnt=1&late=1&o1=&o2=&o3=&sh=100&indicators=
&addindicator=&submitted=1&fpage=&txtDate=06%2F11%2F2015#jump)

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Inflation/Deflation -Year to Date price increase in commodities and basics as measured by
futures

(http://www.finviz.com/futures_performance.ashx?v=17)

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Velocity of Money Velocity is a measure of how quickly money is spent. High velocity is
typically a precondition for inflation.

(http://research.stlouisfed.org/fred2/series/MZMV)